Minister of Finance Comments on the Housing Financing Fund

The new minister of finance, MP Bjarni Benediktsson, spoke with Bloomberg the other day. The topic was the Housing Financing Fund and its "red numbers" as Benediktsson put it.

The most notable part of the interview was when Benediktsson wished that creditors of the fund - the owners of HFF bonds - would be "flexible" if and when HFF would request discussions on changing the stipulations on the bonds. The problem with the bonds is that they aren't callable while the HFF mortgages are (in most cases) and have for the last 3 years or so been refinanced with non-indexed mortgages from the banks. The result: HFF sits behind with high-interest debts which aren't callable and truck loads of cash.

Benediktsson guessed in November 2012 that HFF would need perhaps as much as 200 billion ISK from the state but the Fund operates with an avowed state guarantee. The problem is that there is not a single word about state guarantee for HFF in laws about state guarantees. So while it is the "legal understanding" of Benediktsson (who is an educated lawyer I may add) that there is a state guarantee on the HFF bonds, one can easily argue that there is no such formal backup in Icelandic laws.

This is not the first time a politician comments on the HFF situation. In November 2012, trades with HFF bonds were halted twice. The first trigger was a stampede of sellers in the wake of an article in Viðskiptablaðið ("The Business Newspaper") where it was said that the un-callable bonds would have to be made callable to save the Fund. Not a week later, MP Sigridur Ingadottir, commented on the situation, again with Bloomberg, and said it would be necessary to enter renegotiations regarding the stipulations of HFF bonds. Another stampede followed.

In an interview with RUV (The Icelandic "BBC") in November, I pointed that while the state was regularly pumping equity into the Fund - it has gotten 46 billion ISK from the state in new equity since 2010 - the Fund would be able to pay its debts and bondholders could sleep peacefully. But this constant need to pump equity into the Fund would harm the chances of reaching a balanced fiscal budget. And the problem is that a balanced budget is something that is practically a prerequisite for abolishing the capital controls. Both the Central Bank and new minister of finance, MP Bjarni Benediktsson, know this. Abolishing the capital controls is something that is prominent on the "to do" list of the new government. Benediktsson called the capital controls "a flashing warning sign" for foreign investors, telling them to stay away from the Icelandic economy.

So there is an interesting situation brewing. The new minister of finance knows that one of the barriers that he has to cross in order to facilitate the abolishment of capital controls is to get a balanced budget. What is stopping him from doing that is a potential 200 billion ISK bill that arises due to the avowed state guarantee on the Housing Financing Fund. On top of this come a few election-promises such as lowering taxes and financing a debt jubilee to Icelandic households. Endeavouring to mitigate that problem, he wishes that creditors of HFF will be "flexible" when and if the HFF will request negotiations on the stipulations on HFF bonds.

And who are the creditors of HFF? Mainly Icelandic pension funds (64%). Foreigners hold only 4% of outstanding HFF bonds. Something tells me that Icelandic pension funds will never give back an inch when, not if, negotiations on the HFF bonds' stipulations will happen. Something else will have to give in.